Accepting High Federal and State Income Taxes Without Intellectual Scrutiny: A Reflection on Behavioral Economics

In recent years, federal and state income taxes in the United States have reached as high as 44% to 55% of taxable income for high-income earners. Such a substantial tax burden could, in theory, ignite thoughtful debates and resistance among taxpayers and their advisors. Yet, there seems to be a pervasive sense of quiet acceptance among many clients and financial professionals alike. Why is this the case? Why do so many individuals and their advisors appear to accept these tax rates with little critical examination or pushback?

The answer lies in a confluence of psychological factors, ingrained cultural norms, and the path of least resistance. Below, we explore several key reasons why this phenomenon occurs, examining the subtle psychological influences at play and how they shape decision-making.

1. Status Quo Bias: The Comfort of Familiarity

One of the primary psychological explanations for the passive acceptance of high tax rates is status quo bias. People have a tendency to prefer things to remain the way they are, even if the existing situation is suboptimal. This bias can be particularly powerful in the realm of taxes, where many people have grown accustomed to paying a substantial portion of their income to the government.

Rather than challenge or rethink the system, both clients and advisors may find comfort in the familiarity of the current tax structure. They may see the process of rethinking or challenging tax policies as too complex or fruitless, choosing instead to accept it as a fact of life. The mental cost of considering alternatives or taking action—such as lobbying for change or restructuring finances—can seem overwhelming, encouraging people to leave things as they are.

2. Normalization Through Social Conditioning

Cultural and societal norms play a significant role in shaping how people think about taxes. When high tax rates are viewed as the norm, people are less likely to question them. From a young age, many individuals are taught that taxes are a necessary part of life and that they fund essential public services, infrastructure, and social programs. While this is true to some extent, this conditioning can also lead to an unquestioning acceptance of tax rates, regardless of their fairness or impact.

Financial advisors, who operate within the same cultural context, may also internalize these norms. In some cases, they may fail to critically examine the true impact of tax policies on their clients' wealth and long-term financial goals. Instead, advisors may focus on helping clients optimize within the system, rather than questioning the system itself.

3. The Complexity of Tax Law: A Deterrent to Critical Thinking

Another factor contributing to the passive acceptance of high tax rates is the sheer complexity of tax law. The U.S. tax code is notoriously intricate, filled with convoluted rules, exceptions, and loopholes. For the average taxpayer, and even for many advisors, understanding all of the intricacies can feel like an insurmountable challenge.

When faced with such complexity, many people resort to heuristics—mental shortcuts that simplify decision-making. In this case, the heuristic might be as simple as “the government knows best,” or “these are the rules, so we have to follow them.” The complexity of tax law creates a barrier to deeper intellectual engagement, leading people to accept the status quo rather than invest the time and energy required to understand the broader implications of the system.

4. The Cognitive Dissonance of Wealth and Taxes

For many high-income earners, paying a substantial percentage of their income in taxes creates a sense of cognitive dissonance—the discomfort that arises from holding two conflicting beliefs. On the one hand, these individuals may feel that they have earned their wealth through hard work and should be entitled to keep more of it. On the other hand, they may also believe that they have a social responsibility to contribute to public goods and services.

To resolve this internal conflict, many people choose to downplay the significance of the taxes they pay. Rather than confront the dissonance head-on, they may rationalize their tax burden as a necessary part of living in a civilized society. This psychological coping mechanism allows them to maintain their sense of self-worth and avoid the discomfort of feeling overtaxed.

5. Advisors’ Focus on Compliance Over Strategy

For financial advisors, the professional focus is often on ensuring that their clients remain in compliance with tax laws, rather than actively seeking to question or challenge them. Advisors may feel that it is not their role to engage in policy debates or to encourage their clients to question tax policies.

Furthermore, the complexity of the tax system can incentivize advisors to spend more time helping clients navigate the current structure than questioning it. Tax optimization strategies such as deductions, credits, and deferrals provide immediate, tangible benefits to clients, whereas engaging in broader intellectual discussions about the fairness or efficacy of tax rates may seem like a fruitless exercise. Advisors may also fear being seen as contrarian or politically motivated if they openly challenge the system.

6. Loss Aversion: A Reluctance to Risk Challenging the System

Loss aversion, a principle from behavioral economics, suggests that people tend to fear losses more than they value gains. This concept helps explain why clients and advisors might shy away from efforts to challenge the tax system or seek significant reform. The perceived risk of losing what they currently have, whether it’s financial stability or professional standing, outweighs the potential benefits of exploring alternatives.

In this context, the fear of government audits, penalties, or simply “rocking the boat” can deter individuals from engaging in deeper analysis or pushing back against tax policies. As a result, it becomes easier to accept the status quo rather than take on the perceived risks of challenging or rethinking tax structures.

Conclusion: The Path of Least Resistance

The quiet acceptance of high federal and state tax rates, ranging from 44% to 55%, by clients and advisors can be understood as a product of psychological biases, social conditioning, and the complexities of the tax system. Rather than intellectual engagement, many choose the path of least resistance, opting to focus on tax compliance and optimization within the existing framework.

By recognizing the factors that contribute to this passive acceptance, advisors and clients alike can begin to engage in more thoughtful discussions about their tax burden. Such discussions could pave the way for exploring more effective tax strategies and, perhaps, advocating for a more equitable system that better balances individual financial success with societal needs.

While acceptance may be easier, a deeper intellectual inquiry into the fairness and impact of such tax rates could yield meaningful change.